Archive | Raising Capital

Using Social Media to Raise Capital?  Bad idea (even it is to buy beer).

Using Social Media to Raise Capital? Bad idea (even it is to buy beer).

If you are raising capital for your startup business through some sort of securities offering (i.e.  selling stock, LLC units, notes, bonds…etc…to investors), hopefully you have sought the advice of a good lawyer.  And hopefully the first thing that lawyer did was grab your ear and explain to you the concept of “general solicitation.”  And hopefully then that lawyer explained to you that if you generally solicit potential investors, you run the risk of getting smacked silly by the SEC and state securities regulators – especially if those solicitations turn into actual sales of securities.

In general, the rule against general solicitation means that you cannot advertise, engage in a mass mailing, or issue a press release that discusses the existence of your offering / potential offering of securities. A conservative interpretation of the SEC’s view is that all potential investors should be people with whom a company, its directors, officers, or full-time employees have a pre-existing business relationship.  If you want to generally solicit, you need to register your securities with the SEC, which means big bucks in legal and underwriting fees (e.g. and IPO).

Now you can officially add social media to the list of no-no’s (which should have been quite obvious anyways).

Yesterday the SEC announced a settlement with two advertising executives who launched a Twitter and Facebook campaign to buy the Pabst Brewing Company, makers of the questionably classic beer Pabst Blue Ribbon.  They also created a website that is no longer around – BuyaBeerCompany.com (yes!).  Their stated goal was to raise $300 million to buy Pabst.  So they started taking pledges, and apparently received around $15 million in pledges within a few weeks – and the full $200 million from 5 million pledgers within 5 months (wow!).  Of course this attracted media attention, which alerted the SEC to the campaign, and of course the SEC got all hot and bothered.  This was clearly a general solicitation, and the SEC was having none of it.   In the end, the two never received the $300 million in pledges, and never collected any money.  The SEC issued an order finding that these two knuckleheads violated federal securities law. As a result, they must cease and desist from committing or causing any violations and from committing or causing any future violations federal securities law – which the knuckleheads consented to without admitting any wrongdoing.

This was more about setting an example than actually dishing out punishment (they got slapped on the wrist). The clear message is that if you start tweeting to the masses that you are raising money, be prepared to get an SEC boot planted in your rear.  Luckily for these guys they never actually collected any money, and more importantly, never lost any money they may have collected – because then this would have been about punishment – and the penalties can be quite severe.

I am not always a huge fan of our securities regulatory scheme – sometimes it makes it very difficult and expensive for a startup with little capital to raise the capital it needs to get off the ground or expand.  And this is coming from someone who makes a decent living advising business owners who are raising capital.  Still, there is a reason these laws and regulations are in place (scam artists lurking EVERYWHERE).  So if you are raising capital, be careful, and get some good advice.  And stay off the twitter. And the facebook.  And don’t launch a website called “PleaseInvestInMyCompany.com” (I already own that domain name anyways).

 

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Private Placements – A Brief Overview of Raising Capital with a PPM

Private Placements – A Brief Overview of Raising Capital with a PPM

If you are looking to raise capital for your business, a private offering of securities might be one way for you to consider. Selling securities, whether it be to friends and family or angel investors, is an excellent means of raising capital if you are prepared and do it the navigate the maze of state and federal laws and regulations involved.  The following is intended to provide a basic understanding of raising capital via the private placement process. You should retain the services of a private placement attorney to advise you through the entire private placement process.

The SEC created Regulation D, which creates certain rules for private offerings. By following these rules, an issuer (i.e. a company selling stock, LLC units, partnership interest, notes, or other forms of a security to raise capital) generally may raise capital without a public offering.

Generally, a private offering may have no more than 35 investors. On the federal level, though, certain high-net-worth investors defined as “accredited investors” may be excluded when calculating the number of investors. There must also be NO general solicitation of investors by the issuer – no advertising. Just this weekend I came across someone soliciting the “private” sale of securities on Twitter – definitely not a good idea if you are trying to comply with the registration exemptions under Regulation D.

The federal securities laws for both public and private offerings are based on the premise that investors in securities are best protected by the disclosure of all relevant information regarding the securities and the issuer. The underlying guideline in this respect is Rule 10b-5, which requires the issuer to disclose to investors anything material that a reasonable investor would want to know prior to making a decision to invest. This is why PPMs are stocked to the brim full of material facts, disclaimers, and lots and lots of risk factors. Failure to properly include these and other items may subject the issuer to serious liability, including being forced to buy back the securities from the investor, as well as damages. If you want to avoid liability, overdisclose, do not hide anything, and do not mislead (among other things of course).

Keep in mind that there are also state “blue sky” laws to comply with – and they will need to be complied with in every state that a security is offered and/or sold.

There are lots and lots of land-mines to avoid when raising money in a private offering – so make sure to consult a private placement attorney / securities law attorney before you raise capital for your business. Also, I may be a lawyer, but the above is not legal advice!

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Raising Venture Capital – How Much Should You Give Up?

Raising Venture Capital – How Much Should You Give Up?

From the title of this post, you are probably assuming it refers to the chunk of your company you will be giving up in exchange for an infusion of capital.  You would be right – mostly.  In addition to giving up equity, start-up founders also give up some measure of control when they raise venture capital.  Therefore, the first part of this post will deal with equity; the second part will deal with control / governance.  Keep in mind that what i say below is not necessarily applicable to seed capital or early angel rounds – which I will discuss in a later blog post.

How Much Equity Should You Give Up?

Easy money 24

Don't expect a free lunch.

Unfortunately, the answer is not something you will typically have control over.  Generally, an investor will give a value to the business based on the net present value of future cash flows, then setting its desired ownership percentage based on its target internal rate of return.  A big component to this determination will be the level of risk associated with the investment.  So if you want to give up less, you’ll need a good valuation…and you’ll need to minimize risk.

How Much Control Should You Give Up?

Unfortunately, this is someting you will also not have much control over.  A venture capiltalist will want board seats.  They probably will not require control of the board, but they will likely require supermajority voting provisions on certain issues such as spending capital, raising capital, and selling the business.  The venture capital board members will also likely require directors fee and reimburesement for travel expenses.   Make sure that the number of seats the investor is entitled to adjusts based on percentage ownership; so as that percentage goes down, so do the number of board seats they are entitled to.  Also keep in mind that venture capitalists typically bring very valuable wisdom and exprience to the table – so having them on your board is not necessarily a bad thing.

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Operations:  Adding Fuel to Your Ideas to Get Your Business Moving

Operations: Adding Fuel to Your Ideas to Get Your Business Moving

Running a business is like one long road trip and your business plan is your road map.  Staying with the “map” metaphor, the strategy section outlines where you are going and the operations section describes the type of fuel you will put in your engine.  Here you begin the process of  dividing the tasks and responsibilities so no important details are forgotten, and resources are allocated appropriately.

Sales and Sales Management – The plan should include discussion on who will conduct sales and how will they be trained and compensated.

Manufacturing/Supply – Think of manufacturing in broad terms. What is your process for creating and delivering your product or service?

Staffing Issues – Summarize the current key job descriptions and outline a plan for business continuation.

Controls – Recordkeeping and documentation are important parts of your business. Lenders look to your records to be sure there is adequate control over finances. More important, these records will help you as a business owner determine whether you are on track to achieve success. Important records include:

  • Accounting System and Auditors
  • Records for Monitoring Sales Activity
  • Other Marketing Records

Posted in Raising Capital, Starting a BusinessComments Off on Operations: Adding Fuel to Your Ideas to Get Your Business Moving

Market Reasearch, An Important Part of Your Plan

Market Reasearch, An Important Part of Your Plan

When you prepare to vacation in a new city, state, or country, do you set out uninformed about your destination — or do you read a few guidebooks, surf the Internet for advice, or perhaps visit a travel agent? You likely do at least a little bit of homework first so that you know what to expect.

Customers

Everyone is NOT your customer. The more well-defined your customer, the more confidence the reader has that you actually know your market. What is the geographic scope of your market? Is this a hard or soft boundary? Describe demographics of target customers. Why will a customer buy your product? Who are the innovators – the ones who will be first to buy – among target customers?

Product Features and Sensitivities

From the customer’s perspective, describe the three most important features of your product.

Which of the following elements will be most influential in your customer’s buying decision?  Which are irrelevant?

Customer Sensitivities

  • Price, Quality
  • Your Reputation and Customer Service
  • Product Appearance and Size
  • Packaging, Ease of Handling, and Transportability
  • Variety
  • Operating Characteristics
  • Location, Facilities, and Hours of Operation
  • Credit Terms
  • Advertising and Promotion
  • Seasonal Cycles

Competitors

Even new, completely innovative products have competition. Long before your product comes into the market, customers have found ways to solve their problems. Understanding who your real competitors are is critical to your business success. As you analyze your competitors, it can be helpful to think about the three levels of competition.

Level 1 – These companies solve the customer’s problem with products or services that are very similar to yours.

Level 2 – These companies offer an alternative solution to your customer’s problem.

Level 3 – These companies do not solve the same problem, but compete for your customer’s limited resources.

Find this interesting? Sign-up for the Business Plan in 10 Weeks newsletter or purchase “Business Map: A Practical Guide to Business Planning” by Lorraine Ball.

 

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Common Mistakes Business Owners Make

Common Mistakes Business Owners Make

While every  business is different, business owners share many common traits.  As a result, they often make the same mistakes as they work on their business plan.   Here is a list of the ten most common mistakes :

  1. No Plan – It is easy to put  off writing a business plan until you have no choice because your banker, investor, or potential landlord requires it. Unfortunately, that is the worst time to try and write a plan.
  2. No Clear Audience – Why do you need a plan? Are you writing for the banker in hopes of getting a loan, or a potential investors or simply to guide your business.  While the outline is the same, the amount of detail required in each section varies depending on the audience.
  3. Too Much Detail or the Wrong Type of Detail – Can you boil down the description of your business to a simple message without getting bogged down in the details?  Limit your product description to an overview, focusing on the problem your product solves and its unique features/  Remember to leave out the jargon and industry slang.
  4. Poorly Defined Customer – Everyone is not your customer. With a clear, specific definition of your target customer, it is easier to write a clear, specific plan.
  5. Limited Market Research – Just because you love your product or idea, it does not mean anyone else will.    (By “anyone,” I mean anyone other than your mom, spouse, or best friend.) Who are these people, and what will make them buy?
  6. Underestimating your Competitors – Everyone has a competitor. Even truly innovative products must deal with competing products or services which may or may not solve the same problem, but ultimately will compete for the end customer’s available resources.
  7. No Meaningful Goals and Milestones – What will you accomplish?  Be specific.  How long will it take you and how will you measure your progress along the way?
  8. Activities Not Tied to Goals – Your goals form the basis of other decisions. Use the planning process to eliminate activities which do not move you closer to your goals.
  9. Unsupported Financial Projections – Unrealistic financial projects with a hockey-stick-shaped growth curve, set up a business for failure when owners spend too much too soon without enough cash reserves to help the business through the startup phase. As you develop financial projections, consider two scenarios: a best case and a worst case.
  10. Inadequate Consideration of Pitfalls – Stuff happens! Things go wrong. When the worst happens, will you be prepared? Having an adequate assessment of risks is not being negative — it is being prepared.
  11. Failure to Communicate – I know, I promised a list of the ten most common mistakes, (but don’t you like getting the little extra from time to time? ) While not directly a part of your document, poor communication will have a detrimental affect on your business. As you write your plan, involve others.  Seek advice from people you respect. Talk to employees, family members, business partners, and advisers, such as your accountant and lawyer.

Need help getting your plan started?  You can download a free copy of my business plan outline

Posted in Business Loans, Managing Your Business, Starting a BusinessComments Off on Common Mistakes Business Owners Make

6 Big Mistakes that Startups Make.

6 Big Mistakes that Startups Make.

Oops!!There is a great post on Venturebeat.com about 6 common legal mistakes startups make.  Some of these have been covered elsewhere on this blog – some not.  Here is the cliff notes version- check out the post itself for more details:

  • IP Ownership – make sure it can be transferred to the startup.
  • Choice of Entity – choose carefully.  They recommend a corporation instead of an LLC.  I disagree on a certain level, as I have stated before on this blog and my Indiana Law Practice Blog.
  • Place of Incorporation – they say Delaware.  Again, I disagree to an extent (see this post).
  • Vesting Restrictions – make sure founders stock vest over time, otherwise you run the risk of a founder leaving early on and keeping all of his /her stock.
  • Securities Law Compliance – beware of not complying when issuing any securities to anyone, no matter who they are.
  • Legalzoom – avoid like the plague.  Hire an attorney! 🙂

Posted in Choosing a Business Type, Raising Capital, Running a Business, Starting a BusinessComments Off on 6 Big Mistakes that Startups Make.

Web-Based Startup Funding in 2011

Web-Based Startup Funding in 2011

In Guy Kawasaki’s book Reality Check, he outlines his startup costs for a website that he launched back in 2007.  This website never quite took off, but it was similar to websites like Digg and Reddit.  Guy launched a website that had the ability to scale, and the ability to handle the 250,000 unique visits that the site received on the first day.  He built this business for less than $13,000! He even spent $5,000 on legal fees just in case the website took off and needed to be structured in such a way to accept investors.  Remember this was back in 2007. Startup costs are even lower today.  With such low startup costs, anyone can launch a technology based startup in 2011.  Let’s look at 3 funding options for the web-based startup.

  • Seed Funding Programs – There is a new wave of seed funding programs that take an equity position in your startup company in return for startup capital, mentoring, and product development services.  One such organization is SproutBox in Bloomington, IN.  SproutBox claims, “we are an elite crew of product developers, creatives and business experts. We invest our talent in startup companies with high growth potential in exchange for equity.”
  • Microloan Programs – The Small Business Administration (SBA) has recently increased its commitment to their Microloan Program, by raising the maximum loan amount to $50,000 for small businesses.  These loans are fixed interest rate, up to a 72 month term, and can range from $5,000 to $50,000.  The Flagship Enterprise Center Microloan Program is Indiana’s newest and most active microlender, and is looking to help fund tech-based startups.
  • SBA Express Loans – According to the SBA website, “the SBAExpress program gives small business borrowers an accelerated turnaround time for SBA’s review. You will receive a response to your application within 36 hours.”  There are also SBA preferred lenders that have the ability to lend in all 50 states.  One example of an SBA preferred lender is Strategies for Small Business, who can provide funding from $5,000 to $25,000.

So if you have a web-based startup idea, launch today.  In 2011, the rules have changed.  Anyone can start a successfully web-based company for less than the price of a new car.  Good luck!

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Raising Venture Capital – A Checklist of Documents.

Raising Venture Capital – A Checklist of Documents.

Raising venture capital / private equity requires more than just pitching your idea and business plan to a group of people with money to invest – although your pitch is obviously a crucial component.  There are lots of documents that will be required, and those documents will usually require the careful scrutiny of a venture capital attorney. Below is a short, but not inclusive, list of what you might expect:

  1. Don't expect a one page agreement.

    Don't expect a one page agreement.

    Venture Capital Term Sheet – These are typically non-binding outlines of the terms of a venture capital deal.  Don’t let the “non-binding” portion fool you, though.  Terms laid out in a term sheet serve as the basis for all future negotiations, and any attempt to deviate from those terms will not be met kindly during deal negotiations.

  2. Stock Purchase Agreement – This is the definitive agreement setting forth the terms of the venture capital investment, such as the purchase price, the closing date, and the conditions surrounding the issuance of stock – which more likely than not will be preferred stock.   There will also be numerous representation and warranty provisions, among other provisions, that will need to be carefully crafted by a venture capital attorney.
  3. An Amendment to the Bylaws – Assuming the company is a corporation and that the VC is conditioning its investment on the receipt of preferred stock (which it likely will), the bylaws of the corporation will need to be amended.  This amendment will create a new class of preferred stock and will include anti-dilution provisions. dividend rights, liquidation rights and conversion rights.  Some states require a “Certificate of Designation” to accomplish this, rather than an amendment to the bylaws.
  4. Right of First Refusal / Voting Agreement – This agreement will grant the VC a right of first refusal to purchase any shares in the company that come available for sale.  It will also likely contain a number of restrictions on the transfer of common stock, as well as tag-along rights allowing the VC to participate in the sale of any common shares.  Finally, there will likely be a voting agreement requiring that the common shareholders elect the VC’s nominee(s) to the company’s board of directors.
  5. Consulting Agreement – Often times a VC will require payment of a monthly fee by the company in return for certain management services provided by the VC.

These are just a few of the documents that a company might normally expect to see during the process of raising capital.  As always, you should consult an attorney with knowledge of the venture capital process.

What do you think?  Anything else to add to the checklist

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The Indiana Venture Capital Tax Credit

The Indiana Venture Capital Tax Credit

Are you raising private capital for your business.  If so, you may be able to offer an additional incentive to your investors – a hefty tax credit.  The Indiana Venture Capital Tax Credit is a statutory incentive for investors to make investments in early stage Indiana business startups.  Investors who provide qualified debt or equity capital to Indiana companies receive a credit against their Indiana income tax liability.

(In case you don’t know, a tax credit is a direct offset of the income tax you owe.  In this case, if your tax liability for a given year is $2,000, and you have a tax credit of $1,000, your tax liability is reduced to $1,000.  Ding!)

This is a great incentive to offer your investors – assuming they have Indiana income tax liability.  If someone has no Indiana tax liability, the Indiana Venture Capital Tax Credit will have little to know value to them.

In order to become a qualified Indiana businesses for purposes of the Venture Capital Tax Credit, Indiana businesses must go through a certification process by submitting an application to the the Indiana Economic Development Corporation.  Additionally, after a taxpayer makes the investment, the taxpayer must submit proof of investment to the IEDC from which the IEDC shall issue the taxpayer a letter indicating that the taxpayer is entitled to a tax credit.

The maximum amount of tax credits available to investors in a  qualified Indiana business equals the lesser of either (a) the total amount of qualified investment capital provided to the qualified Indiana business in the calendar year, multiplied by 20%; or (b) $500,000.

If you trying, or intend to try, to raise capital, make sure you explore this option.

If you have had experience using this tax credit, either as company raising capital or an investor, please share your thoughts in the comments!

Posted in Government Funds, Raising Capital, Why Indiana?Comments Off on The Indiana Venture Capital Tax Credit

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